ROMAN CATHOLIC DIOCESE OF MADISON, INC. AND AFFILIATES CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS REPORT JUNE 30, 2018 AND 2017

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1 ROMAN CATHOLIC DIOCESE OF MADISON, INC. AND AFFILIATES CONSOLIDATED FINANCIAL STATEMENTS WITH INDEPENDENT AUDITORS REPORT

2 TABLE OF CONTENTS Page 2-3 Independent Auditors Report FINANCIAL STATEMENTS 4 Consolidated Statements of Financial Position 5-6 Consolidated Statements of Activities 7 Consolidated Statements of Cash Flows 8-34 Notes to Consolidated Financial Statements - 1 -

3 INDEPENDENT AUDITORS REPORT The Most Reverend Robert C. Morlino Bishop of Madison Roman Catholic Diocese of Madison, Inc. Madison, Wisconsin Report on the Financial Statements We have audited the accompanying consolidated financial statements of the Roman Catholic Diocese of Madison, Inc. and Affiliates (the Diocese and Affiliates), which comprise the consolidated statements of financial position as of June 30, 2018 and 2017, and the related consolidated statements of activities and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Organization s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the organization s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion

4 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Roman Catholic Diocese of Madison, Inc. and Affiliates as of June 30, 2018 and 2017, and the changes in its net assets and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter As discussed in Note 21 to the financial statements, an error in the recording of the Priests for Our Future endowment earnings was discovered during the year. Accordingly, the 2017 financial statements have been restated to correct this error. La Crosse, Wisconsin October 23,

5 ROMAN CATHOLIC DIOCESE OF MADISON, INC. Madison, Wisconsin FINANCIAL STATEMENTS

6 ROMAN CATHOLIC DIOCESE OF MADISON, INC. AND AFFLIATES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (dollars in thousands) JUNE 30, ASSETS Restated Cash $ 3,840 $ 4,846 Accounts receivable, net 2,563 1,357 Pledges receivable, net 6,060 10,141 Broker sales in process Inventory Prepaid expenses Investments and interest in master trust 23,055 20,702 Investments in Catholic Diocese of Madison Foundation 38,330 33,222 Property and equipment, net 10,682 8,073 Direct financing lease receivable 5,405 5,405 Tax credit loan receivable 3,568 3,424 Pension plan asset 3,127 1,276 Beneficial interest in perpetual trust TOTAL ASSETS $ 97,863 $ 89,910 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable $ 528 $ 653 Pledges payable Accrued expenses Collections held for others Notes payable 2,500 1,130 Brokerage pending purchases Accrued post retirement benefits 7,610 8,706 Annuities payable Deferred revenue 2,327 2,263 TOTAL LIABILITIES 15,076 14,824 NET ASSETS Unrestricted 30,041 24,824 Temporarily restricted 24,036 26,012 Permanently restricted 28,710 24,250 TOTAL NET ASSETS 82,787 75,086 TOTAL LIABILITIES AND NET ASSETS $ 97,863 $ 89,910 The accompanying notes are an integral part of these statements

7 ROMAN CATHOLIC DIOCESE OF MADISON, INC. AND AFFLIATES CONSOLIDATED STATEMENTS OF ACTIVITIES (dollars in thousands) YEAR ENDED JUNE 30, 2018 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL REVENUE, GAINS, AND SUPPORT Contributions $ 982 $ 3,307 $ 39 $ 4,328 Parish assessments 5, ,098 Program fees and tuition 1, ,643 Cemetery sales Rent revenue (facilities) Interest and dividend income on investments 1, ,568 Annual Catholic Appeal 88 3,308-3,396 Net realized and unrealized gain on investments 1,335 2,815-4,150 Change in value of beneficial interest in trusts - (30) (21) (51) (Loss) on disposal of fixed assets (8) - - (8) Miscellaneous income Net assets released from restrictions 6,934 (11,376) 4,442 - TOTAL REVENUE, GAINS, AND SUPPORT 19,076 (1,976) 4,460 21,560 EXPENSES Payroll and benefits 6, ,336 Net periodic benefit gain on retirement plan (1,328) - - (1,328) Net periodic benefit gain on OPEB (450) - - (450) Professional services Facilities and operating costs 1, ,374 Cost of cemetery and crypt sales Office Education 1, ,106 Program 1, ,092 Fundraising expenses Commercial insurance premium 1, ,706 Grants, donations, and religious dues 1, ,578 Depreciation Provision for uncollectible pledges Other TOTAL EXPENSES 13, ,859 CHANGE IN NET ASSETS 5,217 (1,976) 4,460 7,701 NET ASSETS, BEGINNING OF YEAR - RESTATED 24,824 26,012 24,250 75,086 NET ASSETS, END OF YEAR $ 30,041 $ 24,036 $ 28,710 $ 82,787 The accompanying notes are an integral part of these statements

8 ROMAN CATHOLIC DIOCESE OF MADISON, INC. AND AFFLIATES CONSOLIDATED STATEMENTS OF ACTIVITIES (dollars in thousands) YEAR ENDED JUNE 30, 2017 TEMPORARILY PERMANENTLY UNRESTRICTED RESTRICTED RESTRICTED TOTAL RESTATED RESTATED REVENUE, GAINS, AND SUPPORT Contributions $ 2,649 $ 3,469 $ 60 $ 6,178 Parish assessments 5, ,493 Program fees and tuition 1, ,485 Cemetery sales Rent revenue (facilities) Interest and dividend income on investments 1, ,173 Annual Catholic Appeal 106 3,315-3,421 Net realized and unrealized gain on investments 1,970 2,096-4,066 Change in value of beneficial interest in trusts (Loss) on disposal of fixed assets Miscellaneous income 3, ,424 Net assets released from restrictions TOTAL REVENUE, GAINS, AND SUPPORT 5,952 (12,202) 6,250-23,806 (3,309) 6,354 26,851 EXPENSES Payroll and benefits Net periodic benefit gain on retirement plan 5, ,921 Net periodic benefit gain on OPEB (1,093) - - (1,093) Professional services (85) - - (85) Facilities and operating costs Cost of cemetery and crypt sales 1, ,362 Office Education Program 1, ,110 Fundraising expenses Commercial insurance premium Grants, donations, and religious dues 1, ,547 Depreciation 1, ,596 Provision for uncollectible pledges Other (359) - - (359) TOTAL EXPENSES , ,154 CHANGE IN NET ASSETS 10,652 (3,309) 6,354 13,697 NET ASSETS, BEGINNING OF YEAR - RESTATED 14,172 29,321 17,896 61,389 NET ASSETS, END OF YEAR NET ASSETS, END OF YEAR $ 24,824 $ 26,012 $ 24,250 $ 75,086 The accompanying notes are an integral part of these statements

9 ROMAN CATHOLIC DIOCESE OF MADISON, INC. AND AFFLIATES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) YEAR ENDED JUNE 30, CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets $ 7,701 $ 13,697 Adjustments to reconcile change in net assets to net cash provided by operating activities Depreciation Loss (gain) on disposal of property and equipment 8 (29) Permanently restricted contributions (39) (60) Net realized and unrealized (gain) on investments (4,150) (4,066) Allowance for uncollectible accounts receivable (31) - Change in beneficial interest in trust 21 (44) Change in value of annuity (13) 196 Discount on pledges receivable (115) (216) Allowance for uncollectible pledges receivable (329) (646) Changes in assets and liabilities Decrease (increase) in assets Accounts receivable (1,175) 216 Pledges receivable 4,526 5,057 Prepaid expenses 7 9 Inventory 7 (8) Tax credit loan receivable (144) (3,424) Pension plan asset (1,851) (1,276) Increase (decrease) in liabilities Accounts payable, accrued expenses, and collections held for others (92) 347 Pledges payable (50) 30 Accrued post retirement benefits (1,096) (2,037) Deferred revenue 64 2 NET CASH PROVIDED BY OPERATING ACTIVITIES 3,748 8,134 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (23,543) (12,016) Sales of investments 20,231 7,360 Change in due to/from brokerage 9 (352) Purchase of property and equipment (2,860) (3,672) Insurance proceeds - 18 NET CASH (USED IN) INVESTING ACTIVITIES (6,163) (8,662) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 1,370 1,179 Payments on long-term debt - (50) Proceeds from permanently restricted contributions NET CASH PROVIDED BY FINANCING ACTIVITIES 1,409 1,189 NET (DECREASE) INCREASE IN CASH (1,006) 661 CASH AT BEGINNING OF YEAR 4,846 4,185 CASH AT END OF YEAR $ 3,840 $ 4,846 SUPPLEMENTAL DISCLOSURE OF NONCASH FLOW INFORMATION Trade-in value on fixed assets $ 38 $ 17 Fixed assets in accounts payable $ 256 $ 146 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 27 $ 4 The accompanying notes are an integral part of these statements

10 NOTE 1 - Nature of Activities and Significant Accounting Policies Nature of Activities: The Diocese of Madison (the Diocese) is a not-for-profit Wisconsin corporation, without capital stock. The Bishop of Madison is the canonical administrator of the Diocese. In accordance with the Code of Canon Law (the Code), the Diocese has a Finance Council. In addition to the functions entrusted to it in Book V of the Code, the Temporal Goods of the Church, the Finance Council annually prepares a budget of projected revenue and expenditures for the operations of the Diocese. The Diocese is exempt from income taxes under the provisions of Section 501(c)(3) of the Internal Revenue Code. Accordingly, the financial statements do not include any amounts for capital stock or income taxes. The legal name of the corporation is the Roman Catholic Diocese of Madison, Inc. doing business as the Diocese of Madison. The following activities are separately accounted for but are not separately incorporated from the Diocese and accordingly, are included in the consolidated financial statements: Administrative Offices (or Chancery) Gift Annuity Program Department of Cemeteries St. Raphael Society Clergy Retirement Fund (the priest pension plan) Self-Insurance Program The following affiliates are both separately accounted for and separately incorporated: Holy Name Catholic Center, Inc. (Center), organized for the purpose of operating Holy Name Heights, the former Holy Name Seminary building and campus, once known as the Bishop O Connor Catholic Pastoral Center, located in Madison, Wisconsin. Holy Name Seminary, Inc. (Seminary), organized to fund and provide for the education of men as priests of the Diocese of Madison, doing business as the St. Joseph Fund. Roman Catholic Diocese of Madison Cemeteries, Inc. (Cemeteries), reorganized in 2015 for the primary purpose of holding title to the perpetual care funds those financial assets or investments maintained and used exclusively for the perpetual care of the four separate diocesan-owned cemeteries located in Madison (1), Janesville (1) and Beloit (2), Wisconsin. The Apostolate to the Handicapped, Inc. (Apostolate), doing business as the Apostolate for Persons with Disabilities - Diocese of Madison, organized to serve disabled persons. Camp Gray, Inc. (Camp Gray), organized to own and operate a co-ed, overnight summer camp and year-round retreat center, located in Reedsburg, Wisconsin. Further, the five affiliated corporations referenced above are organized and at all times operated exclusively for the benefit of, to perform the functions of, or to carry out the purposes of the Roman Catholic Diocese of Madison, Inc. The Diocese and its affiliates referred to above maintain their respective accounts using fund accounting, by which the resources of each are classified for internal purposes into separate and segregated accounting funds, each with its own specific activities and objectives. Each fund is an entirely separate accounting entity with its own self-balancing set of accounts for recording that entity s assets, liabilities, net assets, and changes in net assets. The activities of each accounting entity are restricted for their stated purpose, and cannot be used for any other purpose, whether by the same entity or another

11 NOTE 1 - Nature of Activities and Significant Accounting Policies - Continued A summary of the significant accounting policies follows: Basis of Accounting: The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles promulgated in the United States of America for not-for-profit entities (U.S. GAAP) and, accordingly, reflect all significant receivables, payables, and other liabilities. Principles of Consolidation: The accompanying financial statements include the balances and activities of the Diocese, and the organizations it has both control (direction) of and economic interest in (the Affiliates), including the Center, the Seminary, the Cemeteries, the Apostolate, and Camp Gray. Camp Gray operates on a calendar year reporting period. All material intercompany transactions have been eliminated. Affiliates (or related entities) reflect a relationship characterized by control through a majority voting interest in the board of the other entity, and economic interest, the latter achieved primarily through a dissolution provision in the unlikely event that the affiliated entity were to cease operation (e.g. a dissolution or pour over provision). Under canon law and the laws of the State of Wisconsin, parishes, their related school and institutions, and certain other Catholic entities including those owned and operated by religious orders of men and women, operating within the boundaries of the Diocese are completely distinct entities from the Diocese and are not under the fiscal or operating control of the Diocese and, therefore, in accordance with accounting principles generally accepted in the United States of America are not included in the financial statements. These organizations may or may not be separate corporations under civil law, yet they carry out their own services and programs, and report to their respective constituencies. The Diocese and its affiliates are collectively referred to as the Diocese and Affiliates. Basis of Presentation: The Diocese and Affiliates presents its assets and liabilities on the statements of financial position in an unclassified manner, but in order of liquidity. Not-For-Profit Entity: A Church not-for-profit entity is defined as an organization that receives contributions of a significant amount from providers who do not expect commensurate or proportionate monetary or economic return, which operate to provide charitable religious services at no profit, and is absent of ownership interest. The Diocese and Affiliates are all not-for-profit entities. Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period and the reported amounts of assets and liabilities at the date of the financial statements. On an ongoing basis, the Diocese s management evaluates the estimates and assumptions based upon historical experience and various other factors and circumstances. Management believes that the estimates and assumptions are reasonable in the circumstances; however, the actual results could differ from those estimates. Cash and Cash Equivalents: The Diocese and Affiliates considers all cash accounts and money market funds which are not subject to withdrawal restrictions or penalties to be cash and cash equivalents. The Diocese and Affiliates maintains its cash in bank accounts that, at times, may exceed federally insured limits. While the Diocese and Affiliates is exposed to custodial credit risk, the Diocese and Affiliates has not experienced any losses in such accounts

12 NOTE 1 - Nature of Activities and Significant Accounting Policies - Continued Accounts Receivables: The Diocese and Affiliates use the allowance method to account for uncollectible accounts receivables. The allowance is based on historical experience and a review of the current status of receivables. Receivables arising from the sale of mausoleum crypts or cemetery graves are typically collectible in monthly installments over two years. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Changes in the valuation allowance have not been material to the financial statements. If accounts previously written off are collected, the payments are recorded as reductions in bad debt expense. Pledges Receivable: Pledges receivable that are expected to be collected within one year are recorded at net realizable value. Pledges receivable that are expected to be collected in future years are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed using a nominal borrowing rate applicable to the years in which the promises are received. Amortization of the discounts are included in contribution revenue. Conditional promises to give are not included as support until the conditions are substantially met. Management provides for probable uncollectible amounts through a provision for uncollectible pledge expense from outstanding balances and an adjustment to a valuation allowance based on its assessment of the current status of individual pledges. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to pledges receivable. Investments and Interest in Master Trust: Investments are generally recorded at fair value based upon quoted market prices, when available, or estimates of fair value. Those investments for which fair value is not readily determinable are carried at cost. The Diocese and Affiliates records monthly the change of ownership of stocks or bonds determined on the day a trade was made. Investment income and realized and unrealized gains and losses are reflected in the statements of activities as increases or decreases in unrestricted net assets unless the income or loss is restricted by donor or law. Interest and dividend income is recorded on the accrual basis. Investments in marketable securities, in general, are exposed to various risks, such as credit, inflation, interest rate, liquidity, reinvestment, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the value of investment securities could occur in the near term and such changes could materially affect the value of investments reported in the statements of financial position. The Diocese, the Self-Insurance Program, the Cemeteries and the Apostolate are each parties to their own individual custodial agreements with a federally chartered bank which provides custodial services for a Unitized Master Trust. Similar to a common investment pool or private mutual fund, the Unitized Master Trust affords each of these four participants the opportunity to invest in a portfolio of stocks, bonds, institutional exchange traded funds or mutual funds, or other assets including cash. Each participant in the fund individually owns units or shares, which represent a part of these investment holdings. The participants include the Diocese and the Self-Insurance Program, the latter which is separately accounted for from the Diocese though not individually incorporated, the Cemeteries and the Apostolate. The assets of each participant are totally restricted to that participant s stated purpose. Prior to the close of the fiscal year, the St. Raphael Society Clergy Retirement Fund, the Center and the Seminary were spun out of the Unitized Master Trust into separate investment accounts. In accordance with U.S. GAAP, each participant has the ability to redeem its investment in the pool at net asset value per unit or share at the reporting date, and as such, the fair value of measurement of the investment is categorized within Level 2 of the fair value hierarchy. Please refer to Note 4 for information regarding fair value measurement

13 NOTE 1 - Nature of Activities and Significant Accounting Policies - Continued Property and Equipment: Property and equipment are carried at cost, less accumulated depreciation. Acquisitions of property and equipment in excess of $1,000 and expenditures for improvements that materially prolong the useful lives of assets are capitalized. Repairs and maintenance that do not significantly increase the useful life of the asset are expensed as incurred. Depreciation is recorded on a straight-line basis over the estimated useful lives of the respective assets ranging from 3-40 years. Formation of Development Entity and Disposition of Long-Lived Assets: In collaboration with a thirdparty investor holding a ninety-nine percent (99.0%) interest, in December 2014, the Diocese and Affiliates organized Holy Name Heights, LLC ( Tenant ) and in exchange of a capital contribution of $29,197, received a one percent (1.0%) interest in this newly created development entity. In addition, Holy Name Catholic Center, Inc. (an Affiliate of the Diocese and Landlord ), owns certain real estate located at 702 South High Point Road, Madison, Wisconsin (Lot 3), consisting of approximately ten (10) acres improved with the newly redeveloped former seminary building. On March 16, 2015, Landlord and Tenant entered into an agreement to lease the Center to Tenant under a long-term capital lease for a term of sixty (60) years. The leased premises includes an approximately 256,000 square foot building, all parking, and landscaped areas relating to the building. Separately, the Diocese and Affiliates entered into a commercial lease with Holy Name Heights, LLC, for a term of approximately ten (10) years, commencing on April 1, 2015, to lease approximately 54,185 square feet of rentable space located in the Center. In this particular transaction, the Roman Catholic Diocese of Madison, Inc. is the tenant and Holy Name Heights, LLC, is the landlord. Please refer to Note 18 for further discussion of the Redevelopment of the former Bishop O Connor Catholic Pastoral Center. Valuation of Long-Lived Assets: U.S. GAAP requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management reviews all material assets annually for possible impairment. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. No assets were deemed impaired as of June 30, 2018 and Collections Held for Others: Collections held for others represent cash donations collected primarily by parishes from parishioners on behalf of other non-diocesan and non-parochial Catholic organizations and programs, and are forwarded to the Diocese for remittance to the designated national agency based on a timetable generally prescribed by the Holy See and the United States Conference of Catholic Bishops. With the exception of funds prescribed and allocated for local use, the collections do not belong to the Diocese, and therefore, are not recognized as revenue in the consolidated statements of activities. Deferred Revenue: The Diocese and Affiliates has short-term and long-term deferred revenue. Deferred revenue primarily includes unearned self-insurance program premium revenue and unearned income on burial fees which are to be recognized as revenue as services are performed. Beneficial Interest in Perpetual Trust: The Diocese and Affiliates is a twenty-five percent (25%) irrevocable beneficiary of a perpetual charitable trust held by a bank trustee provided the Diocese and Affiliates maintains a ministry in support of disabled persons. The beneficial interest in the trust is reported at its fair value, which is estimated as the fair value of the underlying trust assets. Distributions of income from trust assets are restricted for use in the Apostolate disabled persons program and are reported as increases in temporarily restricted net assets. The value of the beneficial interest in the trust is adjusted annually for the change in its estimated fair value. Those changes in value are reported as increases in permanently restricted net assets because the trust assets will never be distributed to the Diocese and Affiliates. Please refer to Note

14 NOTE 1 - Nature of Activities and Significant Accounting Policies - Continued Investments in The Catholic Diocese of Madison Foundation, Inc. (Foundation): Please refer to Note 8. Net Assets: The financial statements report net assets and changes in net assets in four classes that are based upon the existence or absence of restrictions on use that are placed by its donors, as follows: Unrestricted Net Assets - Unrestricted net assets are resources available to support operations that are not subject to donor-imposed stipulations. Board Designated Net Assets - Unrestricted net assets that have a defined use or purpose, as determined by an organization s board of directors. Please refer to Note 13 for detail on the organization s board designated net assets. Temporarily Restricted Net Assets - Temporarily restricted net assets are resources that are restricted by a donor for use for a particular purpose or in a particular future period. In essence, these are resources that are restricted by a donor for use for a specific charitable activity. When a donor s restriction is satisfied either by using the resources in the manner specified by the donor or by the passage of time, the expiration of the restriction is reported in the financial statements by reclassifying the net assets from temporarily restricted to net assets released from restriction. Donor-restricted contributions whose restrictions are met within the same year as received are reflected as unrestricted contributions in the accompanying financial statements. Please refer to Note 13. Permanently Restricted Net Assets - Permanently restricted net assets are resources whose use by the Diocese and Affiliates is limited by donor-imposed restrictions that neither expires by being used in accordance with a donor s restriction nor by the passage of time. In essence, the net assets must be maintained permanently by the Diocese and Affiliates or a trustee if the organization has a beneficial interest in a perpetual charitable trust held by a trustee. The donor of these assets permits the Diocese and Affiliates to use all or a part of the income earned on related investments for specific purposes. Please refer to Note 13. Accounting for Contributions: Contributions, including pledges receivable, are recognized as revenue when received or the promise to give is made. All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Contributions are reported as either temporarily or permanently restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified as unrestricted net assets and reported in the statements of activities as net assets released from restriction. Conditional promises to give are not recognized until they become unconditional, that is, until all conditions in which they depend are substantially met. Insurance Program: The Self-Insurance Program of the Diocese of Madison (the Program) was established to provide uniform liability, property and casualty, automobile, and worker s compensation insurance coverage for member parishes and other participating agencies of the Diocese and Affiliates (the Members ). The Members pay an annual premium based on various criteria to cover their portion of the cost of this program. The Diocese and Affiliates contract with four individual insurance providers to purchase insurance coverage on behalf of itself and the Members and has retained the Catholic Mutual Group (its primary provider) to act as risk/claims manager for all lines of coverage

15 NOTE 1 - Nature of Activities and Significant Accounting Policies - Continued The Diocese and Affiliates administers the insurance program by collecting the premiums from its Members and paying claims as they are incurred. With regard to liability and property coverage, the Diocese and Affiliates is self-insured for the first $150,000 per claim with an annual aggregate stop loss of $300,000 for the years ended June 30, 2018 and With regard to automobile and worker s compensation insurance, the coverage is first-dollar which means the provider pays the entire loss. Liability coverage consists of three primary components and the Diocese and Affiliates arranged for reinsurance through a captive insurance group whereby The National Catholic Risk Retention Group provides $750,000 excess $250,000, for general liability, sexual misconduct, employment practices, and directors and officer s coverage. The Diocese and Affiliates are one of thirty-nine equity owners of the Catholic Umbrella Pool (CUP), which provides $3.5 million excess $1.5 million for general liability, sexual misconduct, employment practices, and directors and officer s coverage. Reinsurance contracts do not relieve the Diocese and Affiliates from its primary obligation to Members and failure of reinsurers to discharge their obligations could result in losses to the Diocese and Affiliates. Management regularly evaluates the financial condition of reinsurers, and is not aware of any circumstances which would indicate that reinsurers will not be able to honor their obligations under the terms of the agreements. Amounts are accrued for unpaid claims and an estimated amount of incurred but not reported claims. Such liabilities are management s estimate and the ultimate liability may differ from the amounts recorded. Assessments from Members are recognized as revenue on a prorata basis over the policy term. Included in accrued expenses are a reserve for an estimated claims expense for reported open claims of approximately $220,000 and $120,000 for the years ended June 30, 2018 and 2017, respectively, and a general reserve for the amount of incurred but not reported claims of $40,000 for the years ended June 30, 2018 and Cemeteries: The Diocese and Affiliates has four cemeteries in southern Wisconsin (the Department of Cemeteries). Revenue associated with pre-need interment and entombment services is deferred until such time as the service is performed. Direct sale of interment and entombment services are recognized as revenue at the date of sale. Inventories consist of unsold mausoleum crypts, shared memorials, and crypt letters with cost determined using the first-in, first-out (FIFO) method for valuing inventory. Separately, with regard to the Roman Catholic Diocese of Madison Cemeteries, Inc., there is a fiduciary obligation to hold certain funds collected for the perpetual care of the cemeteries. The separate restricted perpetual care fund totaled $4,511,755 and $4,082,309 for the years ended June 30, 2018 and 2017, respectively. Income Taxes: The Diocese and Affiliates are exempt from income taxes under Internal Revenue Code Section 501(c)(3) and, accordingly, there is no provision for federal or state income taxes. Accounting for Uncertainty in Income Taxes: Management has analyzed the tax positions taken by the Diocese and Affiliates, and has concluded that as of June 30, 2018, there are no uncertain positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. The Diocese and Affiliates is subject to routine audits by taxing jurisdictions: however, there are currently no audits for any tax periods in progress

16 NOTE 2 - Accounts Receivable Net receivables consist of the following (dollars in thousands): JUNE 30 Accounts receivable $ 2,128 $ 944 Assessment receivable Receivable for construction expenditure Education loans receivable Investment interest receivable SUBTOTAL 2,568 1,392 Less: Allowance for uncollectible receivables (5) (35) TOTAL $ 2,563 $ 1,357 NOTE 3 - Pledges Receivable Pledges receivable, net of allowance for doubtful promises, represent amounts pledged to the Diocese and Affiliates from individuals for the Diocesan Annual Catholic Appeal (ACA), for the Camp Gray capital campaign, and for the Priests for Our Future - The Church is Alive capital campaign and consist of the following (dollars in thousands): JUNE 30 Pledges Receivable - Priests for Our Future $ 4,803 $ 8,930 Pledges Receivable - Camp Gray capital campaign Pledges Receivable - Diocesan Annual Appeal NET PLEDGES RECEIVABLE $ 6,060 $ 10,141 The Priests for Our Future capital campaign was launched in the summer of The Diocese and Affiliates undertook a capital campaign to raise funds to endow seminarian education and to support the Diocesan Office of Vocations. At the direction of the Diocese and Affiliates, the beneficiary of the seminarian endowment fund, the actual campaign receipts are deposited into accounts maintained by The Catholic Diocese of Madison Foundation, Inc. (Foundation). These receivables include payments which are due within more than one year, are unconditional, and are recorded at net realizable value. Pledges receivable for the Priests for Our Future - The Church is Alive campaign consist of the following (dollars in thousands): JUNE 30 Pledges receivable $ 38,167 $ 37,116 Less: Unamortized discount (32) (146) Allowance for doubtful promises (939) (1,240) SUBTOTAL 37,196 35,730 Total payments received (32,393) (26,800) NET PLEDGES RECEIVABLE $ 4,803 $ 8,

17 NOTE 3 - Pledges Receivable - Continued At June 30, the aggregate collection of pledges receivable is as follows: JUNE 30 Pledges receivable in less than one year $ 2,888 $ 5,398 Pledges receivable in one to five years 2,886 4,918 TOTAL PLEDGES RECEIVABLE 5,774 10,316 Less: Unamortized discount (32) (146) Allowance for doubtful promises (939) (1,240) NET PLEDGES RECEIVABLE $ 4,803 $ 8,930 Pledges receivable expected to be received in more than one year are discounted at 1.5 percent for the years ended June 30, 2018 and The estimated bad debt expense relating to the pledges receivable for the years ended June 30, 2018 and 2017 were $939,172 and $1,240,264, respectively. Fundraising expenses for the Priests for Our Future - The Church is Alive were $15,963 and $18,506 for the years ending June 30, 2018 and 2017, respectively. During 2016, a capital campaign was launched by Camp Gray for capital improvements. These receivables include payments which range from less than one year to five years, are unconditional, and are recorded at net realizable value. Pledges receivable for the Camp Gray capital campaign consist of the following (dollars in thousands): JUNE 30 Pledges receivable $ 4,833 $ 2,579 Less: Allowance for doubtful promises - - SUBTOTAL 4,833 2,579 Total payments received (3,995) (1,798) NET PLEDGES RECEIVABLE $ 838 $ 781 At June 30, the aggregate collection of pledges receivable is as follows: JUNE 30 Pledges receivable in less than one year $ 272 $ 209 Pledges receivable in one to five years TOTAL PLEDGES RECEIVABLE Less: Unamortized discount - - Allowance for doubtful promises - - NET PLEDGES RECEIVABLE $ 838 $ 781 Fundraising expenses for the Camp Gray capital campaign were $40,498 and $125,625 for the years ended June 30, 2018 and 2017, respectively

18 NOTE 3 - Pledges Receivable - Continued The Diocesan Annual Catholic Appeal is an annual appeal to generate funding for ministries and services benefiting every Catholic in the Diocese of Madison. These receivables are due within less than one year, are unconditional, and are recorded at net realizable value. Pledges receivable for the Diocesan Annual Catholic Appeal consist of the following (dollars in thousands): JUNE 30 Pledges receivable $ 3,523 $ 3,499 Less: Allowance for doubtful promises (215) (244) SUBTOTAL 3,308 3,255 Total payments received (2,889) (2,825) NET PLEDGES RECEIVABLE $ 419 $ 430 Fundraising expenses for the Annual Diocesan Appeal were $199,194 and $167,221 for the years ended June 30, 2018 and 2017, respectively. NOTE 4 - Fair Value Measurements Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories: Level 1: Fair value is determined using quoted market prices in active markets for identical assets and liabilities. Level 2: Fair value is determined using observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Fair value is determined using unobservable inputs that are not corroborated by market data. In determining the appropriate levels, the Diocese and Affiliates performs a detailed analysis of the assets and liabilities that are carried at fair value in the financial statements. Interest in Master Trust: The Diocese, the Self-Insurance Program, the Cemeteries and the Apostolate hold investments in a private Unitized Master Trust (the Master Trust) managed by a bank. Each participating corporation or accounting entity has a separate and individual interest in the Master Trust and each elects investment strategies based on a defined investment policy. The assets of each participant are totally restricted to the participant s stated purpose. The fair value of the Diocese and Affiliates combined interest in the Master Trust is based on the fair value of the individual underlying securities in the Master Trust. The Master Trust invests primarily in common stocks, bonds, institutional exchange traded funds or mutual funds, or other assets including cash, which individually are primarily considered Level 2 investments. Investments: The Gift Annuity Program, the Center and the Seminary each have separate investment accounts that invest primarily in common stocks, bonds, institutional exchange traded funds or mutual funds, or other assets including cash, which individually are primarily considered Level 2 investments. Mutual Funds and Common Stocks: The fair value of the Diocese and Affiliates investments in mutual funds and common stock are based on quoted market prices as these securities are actively traded on the New York Stock Exchange and NASDAQ.

19 NOTE 4 - Fair Value Measurements - Continued U.S. Government Bonds and Municipal, Corporate and Foreign Obligations: The fair value of the Diocese and Affiliates investments in bonds is determined based on the quoted yield on a security that is most similar to the security being valued, adjusted for variances in the maturity, coupon and other features. Other Investments: Investments in other investment funds (primarily pooled equity funds) are valued at fair value based on the applicable percentage ownership of the fund s net assets. Beneficial Interest in Perpetual Trust: Fair value of the Diocese and Affiliates beneficial interest in perpetual trust is estimated as the fair value of the underlying trust assets. Investments in Foundation: Investments in Foundation are valued at the fair value of the Diocese and Affiliates beneficial interests in the funds held for others in the Foundation. For the years ended June 30, 2018 and 2017, valuation techniques for investment securities have been consistent with the previous years. The table below presents the balances of assets held for the Diocese and Affiliates measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2018 (dollars in thousands): FAIR VALUE MEASUREMENTS FAIR AT REPORTING DATE USING VALUE (LEVEL 1) (LEVEL 2) (LEVEL 3) Interest in Master Trust $ 19,892 $ - $ 19,892 $ - Money Market Mutual Funds Real Estate Fixed Income Common Stock Large Cap Mid Cap Small Cap International Other TOTAL INVESTMENTS 23, , Beneficial interest in perpetual trust Investments in Foundation 38, ,330 TOTAL $ 61,929 $ 960 $ 21,923 $ 39,046 The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows (dollars in thousands): BENEFICIAL INTEREST IN INVESTMENT PERPETUAL IN OTHER TRUST FOUNDATION Balance, beginning $ 194 $ 565 $ 33,221 (Decrease) increase in value of assets (22) 30 2,969 Distributions - (51) (2,341) Contributions - - 4,481 BALANCE, ENDING $ 172 $ 544 $ 38,

20 NOTE 4 - Fair Value Measurements - Continued The table below presents the balances of assets held for the Diocese and Affiliates measured at fair value on a recurring basis by level within the fair value hierarchy as of June 30, 2017 (dollars in thousands): FAIR VALUE MEASUREMENTS FAIR AT REPORTING DATE USING VALUE (LEVEL 1) (LEVEL 2) (LEVEL 3) Interest in Master Trust $ 17,264 $ - $ 17,264 $ - Money Market Mutual Funds Real Estate Fixed Income Large Cap Mid Cap Small Cap International Common Stock Large Cap Mid Cap Small Cap International Other TOTAL INVESTMENTS 20, , Beneficial interest in perpetual trust Investments in Foundation 33, ,222 TOTAL $ 54,489 $ 748 $ 19,760 $ 33,981 The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows (dollars in thousands): BENEFICIAL INTEREST IN INVESTMENT PERPETUAL IN OTHER TRUST FOUNDATION Balance, beginning $ 176 $ 521 $ 23,953 Increase in value of assets ,920 Distributions - - (461) Contributions - - 6,810 BALANCE, ENDING $ 194 $ 565 $ 33,222 NOTE 5 - Property and Equipment Property and equipment consist of the following (dollars in thousands): JUNE 30 Land $ 262 $ 105 Leasehold improvements Land improvements Buildings 6,522 6,453 Building improvements 3,930 3,930 Fixtures and equipment 3,312 3,310 Office equipment 1,129 1,110 Vehicles Construction in progress 2, TOTAL PROPERTY AND EQUIPMENT 19,385 16,327 Less accumulated depreciation (8,702) (8,254) NET PROPERTY AND EQUIPMENT $ 10,682 $ 8,073

21 NOTE 6 - Gift Annuity Program The Diocese and Affiliates has established a gift annuity program whereby donors make a charitable gift to the Diocese and Affiliates and in return receive an annual annuity in equal quarterly installments for their lifetime. Donors may elect to designate a portion of the charitable gift for a parish, school, or other approved charitable organization. Assets received under the charitable gift annuity agreements are recorded at fair value and in the appropriate net asset category based on donor stipulation when received. The present value of future payments is recognized as a liability, and the difference between the liability and the face value of the annuity is recognized as contributions. The Diocese and Affiliates maintains a segregated investment account for the gift annuity program. NOTE 7 - Beneficial Interest in Perpetual Trust The Diocese and Affiliates is the beneficiary of an irrevocable perpetual trust held by a bank trustee. These resources are neither in the possession of, nor under the control of the Diocese and Affiliates. The terms of the trust provide that the Apostolate is to receive a distribution of income from the trust, the amount and timing of which is at the discretion of the trustee. The beneficial interest in the trust is reported at fair value, which is estimated as the fair value of the underlying trust assets. As discussed in Note 4, because there are no observable market transactions for assets similar to the beneficial interest in the trust and because the trust cannot be redeemed, the valuation technique used by the Diocese and Affiliates is a Level 3 fair value measure (dollars in thousands). These amounts are shown as permanently restricted net assets on the June 30 statement of financial position. FMV of trust, beginning of year $ 2,259 $ 2,084 Investment return: Investment income Net realized and unrealized gains Investment fees and expenses (32) (31) TOTAL INVESTMENT RETURN 121 (175) Appropriation for expenditure - spending rate (206) - FMV of trust, end of year 2,174 2,259 Beneficial interest in trust 25% 25% TOTAL VALUE $ 544 $ 565 Annual distributions from the trust to Roman Catholic Diocese of Madison, Inc. and Affiliates totaled $51,389 and $-0- for the years ended June 30, 2018 and 2017, respectively. NOTE 8 - Investments in Foundation The Diocese of Madison and Affiliates has executed three contribution agreements and established three separate endowment funds within the Foundation, specifying itself as beneficiary. Under U.S. GAAP, a specified beneficiary should recognize its rights to the assets held by a recipient entity as an asset, regardless of whether or not the resource provider granted the recipient entity (the Foundation) variance power

22 NOTE 8 - Investments in Foundation - Continued In 2014, the Diocese and Affiliates began a capital campaign as detailed below and in Note 9. Campaign materials state that the funds will be held in an endowment fund within the Foundation, but without variance power. As the Diocese and Affiliates has specified itself as beneficiary, under U.S. GAAP, these transfers are reciprocal, and thus, are recorded as contribution revenue by the Diocese and Affiliates and as an asset and a liability by the Foundation. The combined value of the trusts created through reciprocal transfer and the endowment fund, totaled $38,330,396 and $33,221,916 for the years ended June 30, 2018 and 2017, respectively. Apostolate to the Handicapped Fund In 2013, the Diocese and Affiliates through the Apostolate to the Handicapped, in consultation with and consent granted by the Diocesan Finance Council and College of Consultors, and considering it the best way to fulfill the intentions of the donor(s), entered into a contribution agreement with and transferred $7 million to the Foundation to establish a term-endowment fund. At the time of the transfer, the Apostolate specified itself as beneficiary absent variance power. While this reciprocal transfer of funds is board directed, the donor-imposed restrictions ensure that the funds will only be used for persons with disabilities. The Foundation s policy is to make annual distributions consistent with the then currently adopted spending policy. The current appropriation is five percent (5%). Annual distributions from the Foundation totaled $360,445 and $461,132 for the years ended June 30, 2018 and 2017, respectively. Investments in Foundation at June 30, are comprised of the following (dollars in thousands): Interest in Foundation, beginning of year $ 7,173 $ 6,904 Investment return: Investment income Net realized and unrealized gains Investment fees and expenses (120) (126) TOTAL INVESTMENT RETURN Appropriation for expenditure - spending rate (360) (461) INTEREST IN FOUNDATION, END OF YEAR $ 7,461 $ 7,173 Priests for Our Future - The Church is Alive Fund In 2014, the Diocese and Affiliates undertook a capital campaign to raise funds to defray the cost of recruiting, educating, training, and forming seminarians preparing to be priests of the Diocese of Madison. Accordingly, a permanent endowment fund was established and the Diocese and Affiliates directed that all donations be deposited to the Foundation for the benefit of the Diocese as beneficiary absent variance power. Neither the Foundation s officers nor any other person shall have authority to use the seminarian endowment fund's net contributions, net returns, or corpus for any other purpose